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Buyers Beware of Purchasing New Construction

Real Estate Agent with Long & Foster - Wayne/Devon, Pennsylvania

Although there are not a lot of new construction subdivisions on the Main Line, buyers need to be aware of some of the potential hazards of purchasing new construction and some of the precautions they need to take.

Homebuilders have been hit hard by this economy and many are filing for bankruptcy. If a builder goes bankrupt, buyers could lose their deposit monies, liens could be placed on homes just completed and purchased, builders would no longer be able to uphold their warranties, houses, clubhouses, pools, and/or parks could be left uncompleted and neglected.

What should a buyer do if they are thinking of purchasing new construction?

1 Make sure the builder is financially sound before purchasing any new construction or having a home built. The internet can help you with this especially if it is a publicly held company.

2. Drive through the neighborhood to see if any work is being done. If there aren’t a lot of subcontractors working on completing homes or amenities then that could be a sign the builder is having financial difficulties.

3. Knock on the doors in the neighborhood to see if the owners are pleased with their home and if the builder has been repairing items under warranty.

4. Don’t buy in a neighborhood where you are one of the first homes. If the neighborhood is well established and the builder does get into financial trouble, your neighborhood won’t look like a construction site and you won’t be sharing responsibility for common maintenance with just a few home owners

5. Eliminate some of the risk, such as losing your deposit and being unable to get out of a contract, by purchasing a house that has already been completed in the new subdivision.

If you do decide to have a new home built:

1. Make sure your deposit money is being kept in a third party escrow account; not in the builder’s escrow account so you will have a better chance of having your money returned.

2. Have a clause put in the contract that if the builder goes bankrupt , seeks debt reorganization or debt discharge, the buyer will receive all their deposit monies back and have the ability to declare the contract null and void.

3. In the contract, make sure there is a clause stating that the seller at the time of settlement will make sure a title insurance policy with an affirmative mechanic’s lien coverage clause insuring the home will be available to the buyer.

4. The buyer may also want to include language in the contract that states the property must appraise at the sales price or more in order for the settlement to occur due to decreasing home values. If a lower sales price can be agreed upon by both parties then the closing can take place.

Not all builders are in financial trouble, but all buyers need to be aware and take precautions before purchasing new construction whether on the Main Line or elsewhere.




Visit me at:  www.sarahsellsthemainline.com

Comments (4)

John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Great suggestions, Sarah.  As a former homebuilder, I'm keenly aware of the dangers that unsuspecting purchasers can face.  It's especially important in these financially challenging times.

Apr 22, 2009 12:36 PM
Hannah Williams
HomeStarr Realty - Philadelphia, PA
Expertise NE Philadelphia & Bucks 215-820-3376

Sarah..A terrific Post..There was a local builder who just went belly up.. it was on the local news .. everyone was surprised .......Thank you!tweet

HelpfulHannah your friend in Philadelphia

Apr 22, 2009 03:38 PM
Bob & Carolin Benjamin
Benjamin Realty LLC - Gold Canyon, AZ
East Phoenix Arizona Homes

In today's world with many builders going under there are indeed risks.

Apr 22, 2009 04:52 PM
Heather Fitzgerald
REALTY WORLD-Harbert Company, Inc. - Greenwood, IN
REALTOR Greenwood Indiana Real Estate

I had never heard of the affirmative mechanics lien coverage clause, interesting.  Thanks for this info.

May 07, 2009 12:10 PM